Bags are a craft-able piece of apparel that allow the player to hold more Tools, Items and Armor.
There are currently 9 bags in game.
Here they are in order of smallest to biggest.The leaf bag holds the least (little space but still better than nothing), and the god bag (formerly infinite space, then nerfed to 3000, currently even less) holds the most.
All the bags used to be able to hold so much but Soybeen nerfed them a lot. Now, even the God Bag isn't that OP anymore (about 1000 space only now). You don't require a Bag to hold stuff because if you had no space then you wouldn't be able to grow. Bags are only increasing the amount of stuff you can hold.
Note: Bags don't drop upon death. They remain equipped by the player. However you do lose Bags when you rebirth (you can't escape rebirthing with a God Bag as you can't drop it in a chest before rebirth.